From: Robert S. Schwartz [RSchwartz@lindabury.com]
Sent: Wednesday, January 08, 2003 10:49 AM
To: 'rule-comments@sec.com'
Cc: Robert W. Anderson; 'f.battista@excite.com'; 'jsipple@topps.com'
Subject: SEC File No. S7-49-02
January 8, 2003
Re: SEC File No. S7-49-02/Auditor Independence
Proposed Rules
Dear Sir or Madam:
My comments respectfully focus on tax services, as distinguished
from expert services and legal services.
First, an auditor serves as an advocate for its client wherever it
represents a client before the IRS. The context may be obtaining a private
tax ruling, filing an amended tax return claiming a tax refund, commenting
on proposed tax regulations affecting the client's business, representing a
client before IRS tax examiners or representing a client before IRS Office
of Appeals. All of these contexts involve posturing for the client to get
the best tax result. One example: IRS examination spots, from sketchy tax
return information, an entirely foreign transaction that arguably results
in a $7 million US tax gain, and the IRS wants more detailed information.
As a matter of practice, there is no neutrality present in dealing with IRS
after this tax return is filed.
Second, an auditor audits its own work whenever it proposes a tax
planning strategy to a client or whenever it gives oral or wrtten advice,
for example issues a memorandum, letter, etc., to a client on a tax
planning strategy that the client takes into account in determining to
implement the strategy. One example: an investment banking firm, "ML",
proposes an off-shore tax strategy to generate a corporate capital loss of
$100 million. When the auditor gives advice on the strategy, that is, the
strategy works or it may not, and assuming the client proceeds, the auditor
then audits its own work when it audits the adequacy or overstatement, as
the case may be, of the financial statement tax reserve.
The above two comments are from the perspectve of my 16 years as a
tax lawyer in private practice.
Third, an auditor serves as an advocate for its client wherever it
provides a tax opinion to a third party in a transaction affecting the
audited financial statement. Think, for example, from the perspective of a
hypothetical prudent investor. The investor cannot be held to possess the
knowledge to decide whether the tax opinion reflects opinions of settled tax
law or reflects a position that the IRS can reasonably disagree with. A
prudent, not skeptical, investor therefore would think advocacy. In
addition, the auditor is auditing its own work whenever it audits a tax
reserve affected by the tax issues addressed by its tax opinions relating to
corporate taxes.
Thank you for allowing me to comment on the SEC auditor independence
proposed rules.
Sincerely,
Robert S. Schwartz, Esq.